China airfare reform could affect your travel programme, says BCD.

Business travellers flying popular routes in China, like Beijing (PEK) to Shanghai (PVG), will start seeing air fare price fluctuations as soon as this summer, says BCD Travel managing director Greater China operations Jonathan Kao. Such fluctuations have been rare in China due to the central government’s historical policies for setting airline prices. But China airlines are now setting their own airfares on more than 300 routes, thanks to relaxed regulations introduced in the region late last year. Below, Kao answers questions about what the new regulations could mean for travel programmes – and whether or not airfare prices will heat up this season.

Q: Please provide some background on airfare price control in China.

A: Historically, domestic airfare prices in China were controlled by its government, which worked to keep airfare costs stable by setting pricing for domestic air routes and retaining the authority to approve any price increase or decrease. The government sets maximum fares for domestic flights, and then airlines offer discounts on those rates. China has been gradually relaxing its price caps, allowing airlines to raise fare prices within a certain range. In Dec-2017, the Civil Aviation Administration of China (CAAC) and the National Development and Reform Commission (NDRC) jointly issued a ruling that allows Chinese carriers to set their own prices on certain routes.

While the rules have been loosening up since 2013, last year’s action may prove to be one of the most important reforms in airfare we have seen so far. For perspective, in 2013, only 31 China air routes operated without price control. That number jumped to 724 in 2017 and 1,030 this year, after the ruling.

Among the routes are some of the world’s busiest, including the Beijing to Shanghai to Guangzhou highway, Beijing to Shenzhen, and Beijing to Chengdu.

Q: What is allowed under the new regulations?

A: Chinese carriers are now free to set prices on certain routes, provided stipulations are met:

  • The route must have at least five competing carriers before fares can be changed;
  • The price increase cannot exceed 10% compared to the previous season;
  • The total number of price increases is limited to 15% of the overall “price-unrestricted routes” operated in the last season;
  • Routes connecting provincial capitals are also subject to the flexible pricing.

Q: So, will we see airfare increases?

A: Yes and no. Prices are already starting to change for the Summer – Fall flight season. We should not see any huge jumps or falls in fare prices over a single route. Any fluctuation in price will be stable over the longer term. Remember that the 1,030 “price-unrestricted” routes are subject to full internal competition (five airlines or more) and external competition – high-speed rail and/or highway systems.

We do expect more volatile fluctuation and polarisation in pricing. For example, after the Beijing to Hangzhou route became “unrestricted” in 2015, the full economy fare increased from CNY 1,540 to CNY 2,200, a hike of over 40%. The Shanghai to Zhengzhou route became “unrestricted” in 2016 but prices decreased by 17%.

Q: What does this mean for my corporate travel programme?

A: A few things are bound to happen:

  • Domestic airfare will become more and more “open” and subject to supply and demand and other market forces;
  • Advance booking will become more important as the gap between price ceiling and bottom widens. As a best practice and where possible, travel managers and business travellers should book domestic air tickets seven to 14 days in advance;
  • Pricing for popular routes and popular times (e.g., Monday morning / Friday afternoon) will see an increase over and above the average airfare level. This is a good time to review your travel policy.